My Lords, when these proposals were announced, I was somewhat lukewarm towards them, for some of the reasons that other noble Lords have spoken about today. However, as I thought about the proposals rather more, it seemed to me that there is some sense to them. They are not proposals for everybody. They are not for individuals who work for the public sector or for large companies; they are relevant to individuals who are by nature high risk-reward in their approach. They are willing to be high-risk takers to build up capital for themselves and their families. The proposals are, as has been articulated, for small and medium businesses, and are certainly not appropriate for larger businesses.
The proposals at present are really rather simple and straightforward and may be capable of improvement but not, I hope, of too much embellishment or the whole point of the principle would be undermined. People have the option whether to participate. If you wish to be an employee entrepreneur, here is the chance to benefit with equity on an extremely tax-attractive basis, but you are going to be taking risks just like the entrepreneur himself. One of the problems with small-company share schemes, as I have experienced in my own career, is that they are very limited. Where options have to be used they end up being taxed at nearly 60% and are not particularly attractive. The carrot of tax-free capital gains is attractive.
The subsequent amendment that I will address shortly suggests a template for and guidance on the new scheme. Particularly as it is new and untried, that is needed. The principle of requiring advice I can go along with to some extent, although requiring barristers seems perhaps to be jobs for the boys. The principle of
the scheme seems pretty straightforward. It does not require anyone of huge intelligence to understand the quid pro quo.
Moreover, some of the potential problems have already been addressed via amendments in the other place. There are measures intended to stop any form of coercion. Employees also retain the great majority of their employment rights. Partly paid issued shares cannot be used, so people would not be left with a liability if a company went bust. If shares are inappropriately valued, the deal returns employees to their normal employment status. I am not sure how far one should really go to spoon-feed the principles. If someone is not a natural risk taker, this is clearly not for them, and they should not look to accept a job with this sort of deal.
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I am a huge believer in employee participation. I built a business based on virtually all the employees having equity in that business. While the business was being built, we really could not afford to pay people what I would call full market rates, and because we needed the money to build the business there was a trade-off there. But those individuals had to pay capital gains tax on their eventual gains, and some had to pay income tax because option arrangements were used. In a sense, the risk-reward tilt of the balance was not ideal at that stage.
If I were 40 years younger, or even still today, if I were offered the ability to participate in a young business that I felt could be a huge success, I would certainly opt for this scheme. I would look, bluntly, to my own potential contribution to the business as being my best assurance of employment, not to legal rights. The other side of the coin is that when entrepreneurs set up a business, they have to take a tremendous risk. People never think about that. Many of them have to put their home and family at risk. If the business fails, there is a charge on the house and they lose everything. There is a degree of fairness in the sort of risks that entrepreneurs take and the slightly higher degree of risk for employees who are bold enough to want to become employee shareholders.
One concern is that, increasingly, larger businesses are being run by HR departments. An element of Beecroft is correct. Yes, it is a sound principle to protect people who need protection, but I very much hope there is a realisation that if this country is to recover and compete with more dynamic economies, there will not necessarily be as much scope for the protections and featherbedding that have been enjoyed in the good days of the recent past.
I hope that the proposers of these amendments will reconsider them and wait to see what suggestions the Government come up with, at least to provide codes and arrangements that achieve some of their objectives but without having to use the complexities and expenses of the law, which are very costly for very small businesses.